On Oct 16, Zacks Investment Research downgraded fertilizer maker Potash Corp.POT to a Zacks Rank #5 (Strong Sell).
Why the Downgrade?
Potash Corp. remains affected by macroeconomic uncertainties stemming from weakness across specific developing markets and is exposed to other issues such as price volatility and currency exchange fluctuation. It is also facing certain challenges in its nitrogen business.
Sluggishness across certain developing markets is affecting the global outlook for fertilizers. Moreover, expected reduction in planted acres for corn in North America coupled with depressed crop pricing has created uncertainty about potash consumption.
Potash Corp.'s profit fell year over year in the second quarter of 2015, hurt by lower nitrogen prices. Earnings also trailed the Zacks Consensus Estimate. The company cut the top end of its earnings guidance range for 2015 factoring in a decline in specific spot market prices for potash and expectations of a more subdued nitrogen market, along with weaker pricing.
Potash Corp. remains exposed to a volatile pricing environment. Potash prices are expected to remain under pressure in the near term. Higher supply, reduced global energy prices and modestly softer agricultural fundamentals are also expected to contribute to a more tempered nitrogen pricing environment. Weak pricing is expected to lead to lower nitrogen margin in 2015. Moreover, nitrogen sales volumes are likely to remain under pressure due to curtailment of natural gas supplies by the Trinidad and Tobago government.
In addition, Potash Corp. faces earnings headwinds from tax changes. The amendments to potash taxation in conjunction with the government of Saskatchewan's 2015-16 provincial budget are expected to reduce the company's 2015 pre-tax earnings by C$75-$100 million (roughly $59 million to $79 million). Changes in timing of deduction for expansion and maintenance spending in Saskatchewan will significantly impact earnings in 2015 and to a lesser extent in 2016 as the company winds down its capital expansion projects and incurs increased maintenance capital spending as a result of these expansions.
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